Should you invest in the declining flows of European ETFs?

As investors became more cautious in March, flows into European ETFs slowed

After a robust first two months of the year, flows into European-listed exchange-traded funds slowed in March.

According to data from Morningstar, investors were pouring money into European exchange-traded funds (ETFs) in January and February, with net flows in each of these two months reaching 46.8 billion and 45.4 billion, respectively.

However, this decreased to just 9.4 billion in March as investors appeared to be discouraged from investing in European ETFs due to the Middle East conflict.

According to Jose Garcia-Zarate, senior principal of the investment analysis platform Morningstar Direct, "March marked a clear shift in investor behavior after two very strong months." "Investors became more cautious and withdrew from broad equity and fixed-income exposure as Middle East geopolitical tensions escalated and market volatility increased. A "

The top stocks and funds purchased by do-it-yourself investors in March demonstrated this caution.

Which ETFs in Europe are drawing in flows?

Although investors generally took a cautious approach in March, ETFs in certain industries continued to see inflows.

Garcia-Zarate stated, "We observed selective interest in areas like energy, but overall, investors sat firmly on the sidelines and prioritized liquidity and flexibility over making large directional bets."

The significant drop in flows into equity ETFs, which dropped from 40 billion in February to 8.8 billion in March, was largely responsible for the monthly decline in flows.

In contrast to inflows of 5.2 billion in February and 8.8 billion in January, flows into European ETFs that track bonds went negative during the month, registering net flows of -2.4 billion. This was explained as a result of credit and emerging market debt being impacted by inflationary concerns.

How did stocks in Europe do in March?

According to BlackRock data, ETFs that track European stocks were among the most popular in March, despite a general decline in European ETF flows.

The EMEA (Europe, Middle East, and Asia) region saw £3.9 billion in inflows into exchange-traded products (ETPs), which are the broad category of funds that ETFs belong to and make up the majority of. In contrast, outflows from ETPs focused on US stocks (-£0.7 billion), Japanese stocks (-£0.6 billion), and emerging market stocks (-£0.3 billion).

With EMEA-listed energy sector ETP flows reaching their highest level on record (£2.2 billion), BlackRocks data further supported the idea that ETF investors invested in energy funds last month in an attempt to profit from rising oil prices.

The performance of the relevant stock market indices is not reflected in the geographic balance of ETF flows. In the month ending March 31, the MSCI Europe index, which tracks large and mid-cap stocks in Europe, dropped 9.8%, while the MSCI World index, which tracks global stocks, fell 6.3% and the MSCI USA index fell 4.9%.

To put it another way, although ETFs that tracked European stocks saw higher flows than those that tracked other regions, the continent's stocks actually underperformed in terms of price changes when compared to their international rivals.